Panic Time for Cable Companies?

For a myriad of reasons, customers are fleeing pay TV.

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MINYANVILLE ORIGINAL Are cable companies losing customers to the likes of Netflix (NFLX) and YouTube (GOOG)?

That could be one explanation for the increased level of cord-cutting cable TV companies have reported for the second quarter.

DIRECTV (DTV), the leading satellite TV provider in the country, lost some 52,000 homes in the second quarter, which was the first time it had ever experienced quarterly losses.

Time Warner Cable (TWC) also lost 169,000 subscribers, more than what analysts had predicted. The company still has 12.3 million customers in all, but that nevertheless marks 10 straight quarters of subscriber losses for Time Warner Cable.

The other two in the cable TV big four, Comcast (CMCSA) and Dish Network (DISH), fared relatively better. Both also lost subscribers in the second quarter, but at rates better than previous quarters. Comcast lost 176,000 subscribers while Dish lost 10,000 subscribers.

In all, approximately 400,000 pay TV customers have canceled their subscriptions so far this year, according to Reuters.

It should be noted that the second quarter is traditionally a weak one for pay TV operators, as college students cancel their plans and head home for the summer before resuming their subscriptions in the fall.

However, Sanford C. Berstein analyst Craig Moffett points out to the Wall Street Journal that the year-to-year growth rate of cable subscribers is lower than the rate of new household formation, indicating that "there are homes that are cutting the cord."

The poor economy, high unemployment rate, and lousy housing market have all contributed to the drop in subscriber numbers. Also not helping are the programming blackouts that come during contract negotiations between content providers and pay TV operators, such as the recently resolved tussle between Viacom (VIA) and DIRECTV and the still-ongoing battle between AMC (AMCX) and Dish Network.

However, it is also likely that the rise of free or relatively cheaper online video choices in recent years, such as Netflix, YouTube and Amazon's (AMZN) Prime service, has weakened the cable TV market. Some content providers like Viacom and CBS (CBS) also put up their programming online for free streaming, further weakening the impetus to get a cable subscription.

Among the informal data set of "myself and people I know," virtually none pay for cable. And we watch a ton of TV. We use a combination of Netflix, Hulu, and other services to fulfill our viewing needs. If there's a show I really want to watch that I can't get otherwise – i.e., "Breaking Bad" or "Mad Men" – I buy it on Zune, through my Xbox (MSFT).

If someone like me - a person who by any measure watches a very large amount of TV – can manage to get by without paying for cable, it's bad news for the people who make money off of the traditional model.

With video revenue declining, pay TV companies are turning elsewhere for growth opportunities, such as their broadband Internet businesses, which have higher margins compared to video, where rising costs for buying programming cut into profits. Time Warner Cable, for example, has seen a 28% year-to-year increase in the number of customer who subscribe only to their broadband services.

"Our real opportunity for residential growth rests with our high-speed data product," Time Warner Cable President Rob Marcus said, according to Reuters. "We have been postulating that that's the case for some time now."

Time Warner Cable is embracing instead of fighting competitors like Netflix by marketing its Internet service as being fast and reliable enough to deliver consistent Netflix streams to customers.

Together with Comcast, Time Warner is optimistic that new projects like Google's plan to launch its one-gigabit communications network, Google Fiber, will hasten broadband adoption in the country and boost its broadband subscriber count.

"We are constantly hoping that new [broadband] applications and needs develop. [It will be a] positive development if we can help that happen and if Google can be part of making that happen," said Comcast CEO Brian Roberts in an earnings call last week.

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